The Revaluation That Wasn’t

On June 19, China made headlines by announcing that it was unmooring its currency somewhat from the dollar and letting it move in a “flexible” fashion. While Beijing warned against expecting big currency movements, the expectation globally was that the yuan would appreciate significantly against major currencies.

Bloomberg News

Chinese one-hundred yuan notes

Two months later that hasn’t turned out to be the case. The yuan appreciated at most about 1% against the dollar and is now trading at nearly the same rate as it did on the day before the currency announcement. (Overall, the yuan has appreciated by about 0.4% against the dollar.)

Meanwhile, the dollar has depreciated against the euro and yen -- which means that the yuan has fallen against both currencies too, giving Chinese exports a further competitive advantage. (The yuan has depreciated 3% against the euro and 6.4% against the yen over the last two months.)

To Eswar Prasad, a Cornell university economist who used to head the International Monetary Fund’s China desk, the Chinese moves show how shrewd Beijing is. “In hindsight, it was a masterstroke for China to announce greater yuan flexibility against the dollar right about when the dollar had peaked,” he says.

In the short term, that’s probably correct. But longer term, the Chinese currency policy is bound to stoke protectionist sentiment in the U.S., Japan and Europe, and consternation in developing nations that compete with Chinese exports.

It’s an open question whether there is enough time left before November elections for Congress to pass punitive measures aimed at China’s foreign-exchange policy. But Democrats are planning to push a manufacturing-relief bill this fall, which could become a home for anti-Beijing legislation.

Mr. Prasad says the Chinese are probably figuring they can manage the politics by letting the yuan quickly rise against the dollar by 1% to 2%. “If the Chinese see the political winds start blowing in a way that could hurt them, they’ll allow their currency to bump up,” he says. “They feel that could take pressure off.”